World stocks, euro hit by euro-zone debt worry

Last Updated: Fri, Nov 26, 2010 16:40 hrs

/NEW YORK (Reuters) - World stock markets and the euro slumped on Friday on concern the European sovereign debt crisis will spread within the continent.

Also clouding markets, China warned against military acts near its coastline before U.S.-South Korean naval exercises, which North Korea said risked pushing that region toward war. The North shelled a South Korean island earlier this week.

Worry about the most deeply indebted European nations has intensified, fuelled on Friday as newspaper reports shifted attention from Irish debt to Spain and Portugal. The crisis has lingered amid questions whether indebted countries can meet bond payments.

"Officials now seem to be pressing Portugal to take aid and that's unsettling investors. Peripheral issues are unlikely to go away in the short term, and the euro will remain under pressure into the end of the year," said Manuel Oliveri, currency strategist at UBS in Zurich.

The Financial Times Deutschland reported, without identifying its sources, that a majority of euro zone members and the European Central Bank were urging Portugal to apply for a financial bailout.

EU Commission President Jose Manuel Barroso, along with the Portuguese and German governments, denied the report was true.

The Irish Times, meanwhile, said officials at the International Monetary Fund and in the European Union were examining how senior bondholders could be compelled to pay some of the cost of rescuing Ireland's banks.

Bond rating company Standard & Poor's on Friday cut its ratings on the four domestically owned Irish banks, citing weakened credit-worthiness .

The mounting worry pushed world stocks lower. MSCI's all country world index dropped more than 1 percent, extending the decline since Nov. 5 to 5 percent.

In New York, the Dow Jones industrial average fell 75.38 points, or 0.67 percent, to 11,111.90. The Standard & Poor's 500 Index declined 6.19 points, or 0.52 percent, to 1,192.16 and the Nasdaq Composite Index slipped 7.02 points, or 0.28 percent, to 2,536.10.

The FTSEurofirst 300 index of top European shares was down 0.4 percent. Banks led losses.

Resource-related U.S. stocks led declines, with the S&P materials sector off 1.3 percent as key base metals prices fell, pressured by the advancing greenback and by a rise in margin requirements by the Shanghai Futures Exchange that prompted liquidation of speculative positions.

Freeport McMoRan Copper & Gold dropped 2.2 percent to $98.48.

"The debt crisis in Europe is attracting a lot of dollar buyers, causing risk aversion," said Peter Cardillo, chief market economist at Avalon Partners in New York.

Despite price drops, the reaction to euro-zone debt worry has not yet matched those seen in May and June around the time of the Greek crisis due to the creation of a bailout mechanism involving the European Union and International Monetary Fund.

The EU is attempting to create a more permanent mechanism, but the various proposals floated for what it might contain have created highly volatile markets.

U.S. stock markets will close at 1 p.m. (1800 GMT) following the U.S. Thanksgiving holiday on Thursday. The light trading session follows a Wall Street rally on Wednesday as investors focused on upbeat data on the labor market and consumer spending for the holiday season.


Pressure on the euro has intensified as the spiraling debt crisis threatens to ensnare more countries, including Spain, Portugal and Italy.

The euro fell around 1 percent against the dollar to fresh two-month lows while the dollar got a lift from various factors, ranging from rising optimism about the U.S. economy to tensions in the Korean peninsula.

The euro fell 0.85 percent to $1.3247, having dropped as low as $1.3200 on trading platform EBS.

The dollar rose as high as 84.18, the strongest level since late September. It was last at 84.10 yen, up 0.63 percent, rising further from a 15-year low of 80.21 yen hit at the beginning of this month.

Government debt markets also took their cue from speculation over the euro-zone debt. U.S. Treasury debt tracked German Bunds higher, with both kinds of securities seen as safety plays by jittery investors.

Benchmark 10-year Treasury yields fell to 2.88 percent from 2.91 percent before the U.S. holiday on Thursday.

Ireland's 10-year bonds were yielding 9.5 percent, Portuguese counterparts 7.1 percent and Spanish 10-year debt 5.2 percent. By contrast, German Bunds yielded 2.7 percent.

In commodities, U.S. light sweet crude oil fell 24 cents, or 0.29 percent, to $83.62 per barrel.

(Additional reporting by Brian Gorman and Neal Armstrong in London, and Rodrigo Campos in New York; Editing by Kenneth Barry)

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